Creating durable fixed income portfolios for an evolving market

May 7, 2017

Rick Rieder, BlackRock’s Global Chief Investment Officer for Fixed Income, shares thoughts from the front lines of today’s bond markets.

Exploring the market outlook


Q.We’ve shifted into a new market regime recently, with the Fed tightening policy and economic growth hitting a more sustainable path. How is that shaping the market today?

Rieder: A lot has changed versus where we once were, two and three years ago. We were in an economy with about a 1% percent inflation rate and the potential risk of deflation. Now we’re nearing a 2% inflation rate with some metric risk, meaning more fiscal policy or some pullback on monetary policy could cause inflation to be a bit less or a bit more than 2%. That makes for a really different dynamic for fixed income investing versus several years ago. Now there’s more volatility in the fixed income market and more uncertainty around where investors should take interest rate exposure and what to do at a particular point in time.

This is really different than the prior cycle. Over the last ten years or so, we generally knew where interest rates were going. Now it’s more difficult to know what rates will do because the inflationary dynamic is much more uncertain. However, in this market, you can still generate returns in fixed income, but you’ve got to think more carefully about where you make your allocations.

In this market, you can still generate returns in fixed income, but you’ve got to think more carefully about where you make your allocations.

Q.Given unprecedented monetary policy, we often hear people say “fixed income is overvalued,” which is a blanket statement. But certainly there are opportunities in fixed income. Tell us where you’re seeing them.

Rieder: There are interesting opportunities for taking credit risk in the emerging markets. Compared to 20 years ago – or even just 10 years ago – these countries are in much better shape. Their reserves are higher, their leverage is lower, and they are relatively cheap compared to other parts of the world. Monetary policy has pushed rates in Europe to extremely low levels, which has pulled down global interest rates to distorted levels. But the emerging markets have actually not been tethered to European rates.

Meanwhile, securitized assets are presenting attractive opportunities to generate income. Technicals in the asset-backed market have been tremendous and fundamentals have been improving, particularly in areas like housing and commercial real estate.

So you can build a durable portfolio with core foundations centered around assets with strong technicals and fundamentals such as what we’re seeing in the securitized markets, and benefit from those cash flows, while also taking some credit risk where it looks intriguing, in places like Brazil and Mexico, where rates could come down.


Why BlackRock for bonds


Q.You’re a big believer in diversification and risk management. How does working at BlackRock and using its scale and technology help you manage risks that maybe other firms can’t?

Rieder: The investment world has evolved to where markets have become more efficient in many ways. Social and other media more broadly creates an incredible flow of information. To regularly out-pick the market based on one specific piece of information is impossible. So what should you do? Research, research, research. And analyze. And then allocate your portfolio in a way that ensures you’ve got relative value decisions all around the world, all around the capital stack, and around different asset classes. Then do it over and over again.

It’s a way of tilting the odds in your favor. By repeating that process a million times over, you’re creating a dynamic where you’re not just diversifying to reduce risk, but you’re diversifying in a way that you’ve got a lot of relative value calls that make sense. When you do it over and over, the odds are working for you on a regular basis.

Diligent research and analysis are critical to properly adding diversification and managing risks in your portfolio.

Q.I know you say, “make a little bit of money a lot of times.” How do you do that? How do you balance the risk and opportunities in your portfolios?

Rieder:  We leverage technology incredibly. The key things we do to generate return within portfolios are research, research, research, optimize the portfolio and manage risk. If your research is right, and you’re doing research around the world – looking at a Malaysian health care company, looking at a UK mortgage – and you’re putting all those pieces together, analyzing their convexity, analyzing the analytics, optimizing the portfolio, assessing risk, and then using your technology and stress testing – that’s the recipe for success.

The scenarios that happened five and ten years ago are not likely to happen again two years from now. It’s going to be completely different. So how do you stress test, thinking about those new scenarios and how the assets would work together? How do you create what I call “durable return” – consistent and in equilibrium? We do this by running scenario tests over and over again. Every night, we run about 400,000 different simulations so we can understand what the portfolio might do and where the risk lies. It’s incredibly important.

Using technology to stress test your portfolio allows for a better understanding of what it could do in any scenario and where the risks lie.

Q.You’ve been doing this for a long time and you’re still known as one of the hardest working people at BlackRock. What drives you?


Rieder: Trying to create success in an environment that changes every day is incredibly motivating to me. This industry is one of the most exciting there is. You’re getting new data every day and the intellectual pursuit of trying to apply this new data in today’s environment is incredibly exciting. Then tomorrow we might have an election somewhere, or a different economic number. We’re operating in a new environment every day. Looking at new data, analyzing it, and then measuring your results – did you get it right? – and then thinking about how you could do it better next time. That’s incredibly motivating. It has been motivating me for a long time and continues to be motivating.

Rick Rieder
Global Chief Investment Officer of Fixed Income
Rick Rieder is BlackRock's Global Chief Investment Officer and Co-Head of Global Fixed Income platform.
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